Good news: If you’re looking to buy your first home, or take another step, there are easy times to break in, and we may be in one of them now. Housing downturns, recessions, or economic uncertainty, present ways to climb up the property ladder. The only issue is, not many people take advantage of it.
Now before going further, it’s important to acknowledge just how hard it is to get into the housing market. The slightly technical but seldom discussed truth of the matter, is that it’s decades of credit creation, which cause property values to double every 7-10 years. As property owner you may not care, considering it’s making you wealthy, but as a parent, what makes you wealthy also burdens the next generation with debt. How’s that for an ethical quagmire?
So, it’s harder for first home buyers today especially, because saving a 20% deposit is a lot of money. What’s worse, often the affordable homes first timers buy, are the properties that rise in value at the slowest pace.
At the next rung up the property ladder are the upgraders, who own a home already, but also have a growing family. It’s hard for them too. More mouths to feed, often only one income, and the growing need to live in something more expensive.
All throughout life it’s like this by the way – as soon as things get easy, it’s time for a bigger step. Fail to take it, and it’s more expensive later on.
Sometimes taking the tougher path sooner, is all the ‘lucky’ people do differently.
So why not upgrade, in a downward market?
Like many still living in their first home, there often arises a need to buy a pricier home to accommodate a growing family. It’s counterintuitive taking more risk (by getting into more debt) in a downward property market. It also seems crazy selling your current home after it’s dropped in value. If what you’re selling, and what you’re buying, have both fallen by the same % though, you’re giving away a smaller discount than what you’re getting.
The discount you receive, is larger than the loss you locked in.
So could this be the way to sneak in, or push through to the next level with property? It is for many, but it starts in the mind first.
To pull this off you may need to go against the crowd, and be contrarian when no one else feels like buying. It means you go large when others shrink back. Baron Rothschild, an 18th century British nobleman and member of the famous Rothschild banking dynasty said it best: ‘The time to buy is when there’s blood in the streets’. Falling interest rates may have brought an end to the bloodshed, but there’s still blood in the property market.
Since the peaks in 2021 and especially after accounting for inflation, we’ve had over 2 years of price declines in New Zealand, but this won’t last forever. Eventually, we’ll enter the next phase.
Falling house prices can create onramps for first home buyers at lower prices. It helps the property upgrader also. Now they can afford to buy a larger home for less than the cost of renovating their current home.
Property cycles all you to buy property ‘on sale’.
Benjamin Graham, the father of value investing, made famous the concept of “margin of safety”, where you pay less than what an investment is really worth. It’s about buying at a significant enough discount to ensure if things don’t go well in the market, you’re more likely to be in profit. If applied to property, having a margin of safety means you’re buying a home below its intrinsic value, or for less than its price over a the medium term based on factors like location, and condition.
So that brings me to a discussion I had recently with a couple of clients who came to me for advice.
The latest in the Everyday Investor Podcast is about an everyday homeowner who’s hacking the current housing downturn to get ahead. Matt and and his wife Janine are going to accept a small loss on their current home (for sale) for the promise of a larger discount available on the next home they want to buy.
Matt Schticks is my guest today and while his name is fake, his story is very real. I trust you’ll enjoy this one and remember, a good financial strategy for one person could be terrible for another. I encourage you to do your own due diligence around significant property-related decisions or ideally, get advice just Matt did. Make a time to speak with me here.
